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Joe Eqcome  

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  • Exploiting CEF Market Sector Inefficiency with FOF [View article]
    Alan Young

    The more I reflect on the results of the analysis, the more it seems to makes sense. Most CEF investors seem willing to pay for recurring earnings—as the main objective is a high, current, recurring distribution; they are less willing to pay for capital gains—because of their inability to predict them—and nothing for return of capital distributions.

    For the sake of illustration, let’s assume that a CEF had net investment income of $1.20 per share, capital gains of $.25 and distributes $.15 as a return of capital. Based upon a consistent implied threshold earnings yield requirement of 6% for our sample, the implied valuation per share would be 20.00 (1.20/.06) at the beginning of the year based on recurring earning (net investment income). This would translate into price/earnings (P/E) multiple of 16.7 times recurring earnings (the reciprocal of the earnings yield 1/.06).

    Let’s assume that the distribution is 1.60 per share based upon the combination of net investment income, capital gains and return of capital (1.20+.25+.15= 1.60). Based upon the implied share price of 20 per share, the yield would be 8.0%. While an attractive yield, it may not be sustainable; thereby, forcing investors to rely on recurring income as a basis of valuation.

    So, the tentative conclusion is that investors may be basing their valuation on recurring net income and apply a fairly consistent threshold earnings yield criterion, while ignoring capital gains and return of capital distributions—or at the very least discounting them heavily. This may in turn create an opportunity to capture this capital gains pricing inefficiency.

    You are correct regarding the composition of the CEFBig10 and FOF; their portfolio compositions are different. However FOF’s top industry’s break out appears to have an “OK” distribution among the various fund types. (FOF’s average earnings yield appears to be closer to 5% versus 6% for the CEFBig10.)

    I like to spend some more time exploring whether valuation is based on a multiple of net investment income.

    Joe Eqcome

    On Jul 18 11:29 PM Alan Young wrote:

    > Wow--impressive analysis. I never would have guessed that yields
    > would be so consistent in the CEF world!
    > "Assuming that investors are willing to pay 6.3% on net investment
    > income" ... That is not clear to me.
    > Do you mean, "investors are willing to pay a share price that implies
    > a 6.3% yield"?
    > My other concern about this analysis: have you compared the asset
    > class allocation within FOF to your idealized 10 equal-weighted categories?
    > They could be quite different, for all I know...
    > thanks Joe
    Jul 20, 2009. 12:26 PM | Likes Like |Link to Comment
  • CEF Mergers Drives Special Equity Funds [View article]

    A little history lesson for you. When economics was original taught at Oxford the course was entitled “Political Economics”. The reason was economics was, and still is, considered a social science. Political policies are designed to influence economic and investment behavior. So, it is almost impossible to separate politics from economic policy and sound investments decision making.

    Since America is still a country that recognizes free speech and debate, rather than not injecting my economic and political views—which I believe is crucial to sound investing, why don’t you countermand my arguments with your views if you disagree?

    I, and I’m sure others, would like to hear someone defend an out-of-control fiscal policy and what would be the best places to invest if such were to become an economic reality.

    Joe Eqcome

    On Jul 19 12:32 PM GlobalTrekker wrote:

    > Decent compendium of CEF activity, some more relevant than others,
    > but let's keep this a financial web focus and keep your personal
    > politics out of it.
    Jul 19, 2009. 10:27 PM | 1 Like Like |Link to Comment
  • PIMCO High Income Fund: Substantially Overvalued? [View article]

    Let me address your comments in reverse order. While PHK has paid a constant monthly dividend since inception, two out of three of its CEF peer group reduced its distribution rate since year end: EAD ($.0929 vs. $.1094; payable 8/3/09) and VLT ($.1175 vs. $.1250; payable 12/31/08). The only exception is PHT which has paid the same distribution since its inception in 2002 ($.1375). High yield ETFs seems to payout whatever their net investment income is.

    As it relates to PHK's distributions, for year end 3/31/09, it generated $1.37 per share in net investment income (NII). It distributed $.15 per share on NII to it preferred share holders and $1.46 to its common shareholders. Both were characterized as distributions from investment income. It also reported that at year end it has cumulatively distributed approximately $.07 per share in excess of NII. For FY 2009 it was less than a penny.

    I agree with your contention that the characterization of distribution is complex as it is based upon a separate set of books (earnings and profits) which is different than accrual accounting you and I analyze.

    However, this may be a red herring issue. My main concern regarding the stability of the dividend is the dramatic reduction in leverage and the historic spread that it has contributed to NII. This is where trading profits will need to fill the gap vacated by the leveraged investment NII.

    My issue with trading profits is their unreliability. Investors pay very little for trading profits; look at the historical multiples of asset managers versus investment banks. This is not to mention the excessive premium to its mean and the very powerful gravitation to the mean phenomenon working against the stock price.

    I don’t have a dog in this fight; I’m agnostic regarding the direction of the stock. Will Rogers once said, “I’m not a comedian, I just watch the government and report the facts.”

    Well, I just watch the CEF market segment and report the facts on behalf of the independent retail CEF investor, who I believe has no independent advocate and is vulnerable to ephemeral returns manufactured by fund managements and sworn-off to by brokerage research.

    Whether PHK is a comedy or a tragedy will be determined by the facts and investor dialogues like these.

    Joe Eqcome

    On Jul 10 08:30 AM iel76 wrote:

    > The last information available for this fund on the Pimco website
    > (I visited 2 days ago) showed Undistributed Net Investment Income
    > ("UNII") for this fund. If they are not earning the dividend through
    > Net Investment Income, how is this possible unless there are indeed
    > realized trading gains. I've spent a lot of time looking at this
    > and unfortunately it appears the answer is that dividend coverage
    > is impossible to analyze by simply looking at the portfolio at any
    > given date. We won't know the results of PHK's trading activity until
    > later. What I do know is that the dividend has remained constant
    > since July 2003.
    Jul 10, 2009. 12:18 PM | 3 Likes Like |Link to Comment
  • PIMCO High Income Fund: Substantially Overvalued? [View article]

    Thank you for your comments and the additional documentation supporting the notion that PHK may be overvalued. I think the facts should speak for themselves.

    Joe Eqcome

    On Jul 09 04:09 PM Viajero2007 wrote:

    > Joe Eqcome,
    > I enjoyed your two articles on PHK and agree with your main points.
    > After reading all publicly available information on PHK, I have come
    > to the conclusion that it is indeed "grossly" over-priced for two
    > primary reasons. First, the CEF has become largely driven by retail
    > investors who misunderstand the nature of CEFs and the propensity
    > for price to revert to NAV eventually. I think they are looking at
    > pre-Lehman-bankruptcy price levels to support their investment decisions
    > and are unaware or ignorant of the fact that a significant amount
    > of PHK's equity capital was permanently impaired when they sold a
    > significant amount of their portfolio at distressed prices to repay
    > their ARPs. Data from Yahoo! appears to underscore my hypothesis
    > on retail-driven activity based on the fact that there were -72.6%
    > net institutional sales during 1Q09 are per the following link:
    > The second primary reason for the large premium is that PHK was one
    > of Bill Gross' primary picks during the 2009 Barron's Roundtable.
    > If you look at a five year premium/discount history, you will see
    > that PHK never recorded a large premium (which I would define as
    > 30% or more) until January 2009, which is when Gross recommended
    > PHK in the roundtable. With the exception of a brief return to normality
    > during the height of the March sell-off, this large premium has persisted
    > for approximately six months. Note that this dynamic was first uncovered
    > by JohnnyDiscount as per the following link:
    > I've been frankly amused at some of the creative reasons that retail
    > investors have outlined on the Yahoo! and SeekingAlpha comment boards
    > to justify this obvious market inefficiency. The most credible sounding
    > justification is that "The Bond King," Bill Gross, has taken over
    > as manager and that his skill justifies a premium valuation. However,
    > if you again look at the premium/discount history, you will see that
    > the highest end-of-day premium (97.47%) occurred on 5/6/09, which
    > was prior to the 5/15/09 announcement that Gross had taken over the
    > reins (the premium was 58.47% as of the close on 5/15). I have yet
    > to see a justification which cannot be similarly discredited with
    > basic analysis.
    > The bottom line is that PHK represents a phenomenal pair trade for
    > those investors who have enough knowledge and skill to select high
    > yielding yet fairly valued longs. This trade is a lock for a skilled
    > market neutral trader with a 6 - 12 month time horizon. Furthermore,
    > given the abating run in credit prices it seems as if one could make
    > a reasonable case for a naked short, particularly if PHK trades back
    > into the high 8's or low 9's. This trade is more risky and I would
    > only recommend it for highly vigilant traders who are short-term
    > oriented and technically savvy. Good work, Joe Eqcome, on publicizing
    > this opportunity and warning vigilant longs to prudently take profits.
    > Viajero2007
    > Full Disclosure: I've been short PHK since 6/3/09 and use JNK and
    > a handful of other CEFs and BDCs to hedge income and high-yield exposures.
    Jul 9, 2009. 04:37 PM | 2 Likes Like |Link to Comment
  • PIMCO High Income Fund: Substantially Overvalued? [View article]

    I'm happy for your buying opportunity.

    Joe Eqcome

    On Jul 09 09:22 AM Hops wrote:

    > Funny how these over-valued theories keep coming out the day of ex-dividend
    > when the ETF has the weakest support. A short-selling setup or creation
    > of a buying opportunity.
    > I'm long the fund because I think it's assets will improve in value
    > as the market unfreezes. Last time it took a hit from such an analysis
    > I bought and made a good return.
    > BL
    Jul 9, 2009. 04:20 PM | Likes Like |Link to Comment
  • PIMCO High Income Fund: Substantially Overvalued? [View article]

    If you go to my website homepage (joeeqcome.web.officeli...) you'll see that the article was posted after the market closed yesterday.

    Be careful of impugning someone’s ethics before you have the facts.

    The earlier share drop was more a function of PHK going ex-dividend today.

    Joe Eqcome

    On Jul 09 09:57 AM amorgano wrote:

    > Apprently the people who had knowledge of your article before it
    > was published got out yesterday...nice ethics
    Jul 9, 2009. 01:43 PM | 2 Likes Like |Link to Comment
  • PIMCO High Income Fund: Substantially Overvalued? [View article]
    User 444056

    Thank you for your analysis.

    Your analysis rests on the foundation that PHK is now a trading company versus an investment company. I’m not sure if there is any restrictions regarding what percentage of income a CEF can generate from short term trading activities. (I’m sure someone more knowledgeable can answer this question.)

    Assuming that there is no such restriction, investors are willing to pay a very large premium for Bill Gross trading skills. There might be some justification for that valuation. However, there is not much data to support a CEF trading at such a significant premium as PHK is relative to its mean. The powerful and documented gravitation to the mean is likely to occur over time in the absence of a significantly undervalued, stealth NAV.

    I’m an agnostic regarding PHK’s trading success. I’m just basing my observation on historical facts. Maybe, this time it’s different.

    Joe Eqcome

    On Jul 09 12:13 PM User 444056 wrote:

    > Joe said, "I’d appreciate any additional insight into why this stock
    > is trading where it is."
    > I'll take a stab at this. I'm not a professional analyst, but here's
    > my confusion with Seeking Alpha's analysts and why I own PHK.
    > PHK is a leveraged high-yield fund. Why must "high-yield" come from
    > securities income generated by the fund's portfolio instead of the
    > fund's trading activity?
    > The securities in the fund might not be "earning" +20%, but the money
    > I get out from the trading activity is earning me +20%. Why is that
    > bad for me?
    > Why are analysts analyzing it like a value play? (
    > I get the math about subtracting distributions from income, but the
    > part about not earning and paying out the income from trading --
    > well why shouldn't I expect that? When I buy/sell securities and
    > generate income, I call that "earning". It's not the value-investing
    > form of the word, but it's earnings from my activities, which is
    > security trading. Isn't this what a hedge fund does? (See my interpretation
    > below).
    > Why is this analyst using only the historical premium as a gauge
    > instead of the historical yield?
    > "This is well in excess of its historical premium of 4%."
    > and
    > "Compare this with the metrics of three ETFs that invest in junk
    > bonds"
    > Aren't those other comparative securities getting their yield from
    > the securities in the portfolio instead of their trading activities?
    > In this piece, much more detailed and in depth, I still can't tell
    > why the peer comparisons are valid.
    > Do the 3 ARPS leveraged peers use the same strategies and portfolio
    > mix as PHK? Are they yielding less because they aren't as successful
    > at milking the system? Point 2 is moot if PHK generates it's yield
    > from trading instead of investment income. Point 3 is moot if they
    > adapt to the changing market by moving to more traditional securities.
    > Point 4 is a valid concern. But on the flip side, if the worst is
    > indeed behind us, NAV of PHK will indeed rise. Point 5 is true and
    > valid. But my interpretation is they've changed because the world
    > in which they operate has changed. Point 6: I quite buying, too.
    > How much do the insiders already own, and why should they continuously
    > keep buying more?
    > My interpretation is that PHK has become a hedge-fund-type of investment
    > for the retail investor to take advantage of the distorted market
    > in MBS and CDO securities. For sure, that's a risky game to be in.
    > But doesn't that argue for analyzing PHK as a hedge fund rather than
    > a value or typical high-yield fund? Seems to me the correct analysis
    > is to look at trading strategy, the market in which it trades, and
    > the hedging/risk management of the strategy, not securities analysis
    > ratios.
    > What I gather from these three analysis is they expect PHK will revert
    > to it's historical 12% yield by falling in value to match other high-yield
    > funds producing 12% returns. My reason for owning it is the opposite
    > -- I presume the yield will return to 12% as the management (currently
    > Bill Gross himself) cycles the portfolio out of the old MBS/CDO instruments
    > through trading activities into newer historical norm high-yield
    > instruments, or as the holdings themselves rise in value (as the
    > portfolio securities' internal cash-flows resume) from the shifting
    > economic landscape.
    > Granted, some who follow Elliot Wave Theory don't think we're done
    > with the economic collapse, and others think these old toxic-waste
    > debt instruments are going to live up to expectations of 75% defaults
    > (or worse). But it's my belief that a) the worst is over in the global
    > economy, and b) Bill Gross and company know how to pick the right
    > MBS/CDOs.
    > I sure hope my questions aren't treated as rhetorical. I still haven't
    > read the classic book "Security Analysis", so I really would hope
    > someone can address my misunderstanding on the particular questions.
    Jul 9, 2009. 01:30 PM | 2 Likes Like |Link to Comment
  • What Really Drives the Closed-End Hedge Fund Discount? [View article]

    What is the universe of closed end hedge funds being analyzed?
    Is it a group of publicly traded closed end funds or is it a universe of private hedge funds where someone independently valuing the premium/discount?
    A hyperlink to a source document would be much appreciated.
    Sorry, I'm a pilgrim in this land.

    Joe Eqcome
    Jul 6, 2009. 11:59 AM | Likes Like |Link to Comment
  • CEF Volume Trends May Portend Their Appreciation [View article]

    You claim that CEFs are in a bubble mode. So, I’m making the heroic assumption that this claim is based on your follow up sentence that states CEFs are trading at “all time high premiums….” Of course, this is notwithstanding your implied notion that anyone who invests in CEFs is stupid.

    Setting aside for the moment CEF investor stupidity, unless you’ve developed a valid and reliable model for valuing CEFs NAVs that is different than the one we mortals are employing, there is no empirical evidence to support your claim--none whatsoever on an industry-wide basis. I'm sure anyone of us can point to islolated situations where premiums are perplexing. Case in point is PHK.

    Of course if you have support for you industrywide claim, we would all be appreciative if you could provide us the backup work.

    There is a saw in the investment business, “There are two kinds of statistics, the kind you look up and the kind you make up.” Sound to me you’re trafficking in the latter.

    Oh, by the way, I’m not “taking my book”. I’d love to see your proof for that claim.

    Joe Eqcome

    On Jun 27 10:49 AM mavericks wrote:

    > Author is just talking his book. CEF's are in bubble mode currently.
    > All time high premiums on many I follow as small investors chase
    > yield in tough times. Contrarian indicator?
    Jun 29, 2009. 06:58 PM | 1 Like Like |Link to Comment
  • Spread Between Best and Worst Performing CEFs Narrows [View article]

    At the beginning of each article I spell out "closed end fund (CEF)" so to identify the "CEF" for the purpose of the article is to be denoted as closed end fund(s). This has been the typical convention for abbreviations in legal documents and investment reports.

    If you have a better solution to distinguish the two, I'd be happy to entertain your suggestion.

    Joe Eqcome
    Jun 29, 2009. 09:02 AM | 1 Like Like |Link to Comment
  • iShares Chile ETF Outperforms Credit Suisse Chile Closed-End Fund [View article]

    While I agree with your basic conclusion, the difference in returns and variance may not be as great as you've indicated.

    While not a material difference, and not changing your basic conclusion, I wanted to point out an important criterion for CEF investors is the adjusted returns for distribution and splits. This is important because of the yield nature of CEFs. Over a longer period of time it can be meaningful, particularly when compared to a non yielding investment. If you’re a trader, distribution become less meaningful.

    On share price basis adjusting for distributions and splits, ECH is down 5.4% vs. down 10.2% for CH for the period sighted. (This is versus the -4.6% and -12%, respectively noted above.) This difference is due to the capital gains distribution paid by CH during the period of your chart.

    Additionally, the adjusted index adjusted price standard deviation of each was fairly comparable (ECH: .13; CH: .14)

    I’ve always enjoyed your work. Hopefully you’ll view this comment as additive for retail investors.

    Joe Eqcome
    Jun 26, 2009. 01:13 PM | 3 Likes Like |Link to Comment
  • Last Week's CEF Seesaw [View article]

    So, you're not familar with shorting stocks?
    Good luck with your investments!

    Joe Eqcome

    Jun 22, 2009. 08:55 AM | Likes Like |Link to Comment
  • Morningstar CEF Ratings: Worse Than Random [View article]

    All rating systems, even if it’s looking from a historical prospective, tacitly imply—and investors infer—some value as to its predictive power. If it doesn’t, what’s the point?

    Even the worse of all rating systems, the credit rating agencies (Moody’s, S&P, etc.), implies some predictive power regarding credit worthiness of corporation they analyze. Or why would pension funds and other institutional investors require investment grade ratings for some of their investments if they thought the rating could change tomorrow?

    So, if Morningstar CEF rating are only backward looking and do not imply any predictive power they should be discontinued, because it creates more confusion than clarity for the retail investor.

    At the very least, they should change the name from “rating”—and get rid of the “stars” to something more descriptive: CEF Historical Performance Indicator (“CEF HPI”).

    Additionally, Morningstar should provide a hedge clause anytime that CEF ratings are employed that states: “There is no empirical evidence that Morningstar’s CEF ratings has any investment value at all. It should be used as you would an odometer on your car to be compared with other odometers of your neighbors; which may, or may not, provide you a means to estimate the useful life of your vehicle.”

    Joe Eqcome

    On Jun 09 11:52 PM Wildhawk wrote:

    > You'd think that the author would have gone to the trouble of actually
    > attempting to understand how Morningstar rates closed-end funds before
    > writing an entire article about how bad the rating system has been.
    > The Morningstar closed-end fund rating system is NOT akin to the
    > way they rate stocks (based on their long-term future investment
    > merit), but instead uses the same methodology as open-end mutual
    > funds (where the rating system is based purely on a backward- looking
    > measurement intended to compare similar funds based on their past
    > performance). All the Morningstar ratings system for CEFs is doing
    > is telling you what funds have performed well in the past relative
    > to funds with similar portfolios. It is not intended to be predicted,
    > like their stock ratings are.
    > Since, to my knowledge, all closed-end funds are actively managed,
    > rather than indexed, all the above data shows is that managers of
    > closed-end funds were consistently inconsistent in their ability
    > to outperform their peers- the top managers in one time period became
    > the worst managers in a later time period, not unlike what other
    > studies have shown are similar results from open-end actively managed
    > funds.
    > Anyone who's read a prospectus understands that past performance
    > is not indicative of future returns. If fund investors are using
    > Morningstar's open-end and closed-end fund ratings systems as forward-looking,
    > predictive measures, they're barking up the wrong tree.
    Jun 10, 2009. 01:30 PM | 4 Likes Like |Link to Comment
  • Morningstar CEF Ratings: Worse Than Random [View article]

    First of all, impugning people’s integrity is a serious charge. Let’s review the facts.

    Morningstar has a CEF ratings system. The article was a review of its results over a limited period of time. I’ve acknowledged in numerous places in the article that predicting stock returns is a difficult business and the people at Morningstar are hardworking, well intentioned, high-integrity folks. I sure if you did the same analysis on other rating systems you’d probably get close to random results.

    I’ve also disclosed that I’m in the early development of a rating CEF ratings system. I would place no value on it until it demonstrated its effectiveness--which would probably take a year from this writing. I’ve also indicated that my system might be equally as ineffective once the appropriate data is accumulated. I have not asserted that my ratings are more accurate—they're just there.

    I have no economic interest in my rating system as its available free for those who might have a passing interest. I'm hopeful, that I might be able to incorporate suggestions from others to improve its accuracy.

    Lastly, the article places an emphasis on taking charge of your investments by doing some of your own homework. It’s always desirable to get more than one data point when making investments which I take as a serious business. That data points doesn’t have to be mine.

    This doesn’t sound nefarious to me.

    Joe Eqcome

    On Jun 09 10:05 AM YoYoMama wrote:

    > That you are developing your own rating system for ETFs sincerely
    > casts doubts on the integrity of your motives in posting this article.
    > RE:
    > Disclosure: Joe maintains a CEF rating system on his website that
    > has been operational for a limited time. As a consequence, there’s
    > currently insufficient data for a similar analysis. Once such data
    > has been accumulated, an analysis will be undertaken and presented.
    > It may in fact prove just as disappointing.
    Jun 9, 2009. 12:19 PM | 4 Likes Like |Link to Comment
  • CEFs: Discount at Historical Average [View article]

    With the possible exception of certain muni bond funds, I’m underweighted on the fixed income side—particularly long government/agency bonds. I’m concerned we’re going to see more inflation at some future point in time as global governments print money to float us out of the toxic assets problem. This would put downward pressure on the asset values.

    If you have a slightly positive bias towards the market, you may want to consider “buy-write” CEFs. These CEFs buy a diversified portfolio of stocks and write call option against its portfolio. Such CEFs can generate premium income by writing (sell) the option and if a particular stock gets called away because the share price rises to the option strike price, the CEF can book another gain. You don’t want to owns such funds if you think the market is going to decline as the share price decline can off-set the premium received by writing calls.

    Options are a very specialized investment area which I’m not as familiar as I’d like to become, so caution is in order.

    If you’re so inclined, you might want to consider Eaton Vance Tax-Managed Buy-Write Income Fund (ETB). It has over $300 million in assets, currently yielding 13.9% and is selling a discount of 5.8%.

    Breaking down the 13.9% distribution yield: 2.2% is supported by investment income; if you add on net realized gains it boosts it to approximately 5.8%; the rest coming from return of capital. So, the distribution yield is priced accordingly.

    I hope this is helpful.

    Joe Eqcome

    On Jun 08 10:00 AM oldman wrote:

    > with weakness in employment, housing, retail etc is there any good
    > reason funds that hold goveernment/agency bonds sold off? My thought
    > is perhaps a strong stock market has temporarily changed the flow
    > of funds and weakness in bonds will become stronger a gain. Where
    > would you get your income from now?
    Jun 8, 2009. 12:22 PM | Likes Like |Link to Comment